Aren’t We Done Yet?
LabCo is a large construction contracting firm that serves a variety of industrial
customers that purchase machinery and equipment from LabCo. LabCo’s business
primarily involves the design and manufacture of large industrial-sized machinery and
tooling that is used by its customers in manufacturing parts and components for fighter
jets, transport planes, and other aerospace-related machinery and equipment.
All of LabCo’s construction contracts involve the design, development, and manufacture
of machines that are unique and customized to the specifications of its customers. LabCo
entering into the contract, LabCo realized that this was a unique arrangement that
required a great deal of customer specification in order to meet required performance
standards. However, LabCo also believed that with its extensive experience performing
under similar contracts, including previous contracts with Halibut, the percentage-ofcompletion method of accounting for the new Halibut contract was appropriate.
After the commencement of the new Halibut contract, LabCo began to experience
significant difficulties in the design and manufacture of the six-axis laser cutting
machine. Initial designs had to be redone, certain engineering costs had to be outsourced
to a significant extent because of the termination of a very experienced and key member
of the engineering team, and the cost of steel used in the frame of the six-axis machine
had risen unexpectedly. These changes led to a revision of LabCo’s estimates for the
overall cost to complete the contract, and because of these cost overruns, LabCo expected
that the overall project would incur total costs that would be in excess of the total fixedfee contract price negotiated with Halibut. LabCo management updated its estimates used
in percentage-of-completion accounting to reflect both the cost overruns incurred as well
as the cost overruns expected to be incurred. LabCo management also recorded a
Case 12-05: Aren’t We Done Yet? Page 2
provision for the entire loss on the contract in the period in which it became aware that
contract costs would exceed the total contract value.
After a further six-month delay in the design and construction, LabCo...